According to an industry report released on Wednesday, Chinese companies are rampantly purchasing chip manufacturing equipment, with spending in the first half of this year surpassing the total expenditures of the United States, South Korea, Taiwan, and Japan.
Data from the global semiconductor industry association SEMI reveals that in the first half of 2024, China’s spending on chip manufacturing equipment reached a staggering $24.73 billion. This exceeded the combined expenditures of South Korea, Taiwan, North America, and Japan, which totaled $23.68 billion during the same period. The United States accounts for the majority of spending in North America.
Since the tightening of export controls by the United States in October 2022, China has rapidly increased its spending on chip equipment procurement to counter trade restrictions imposed by the West.
However, China’s investment focus is on the “trailing nodes,” which refer to less advanced processes. Acquiring advanced process equipment is challenging, and Chinese companies still struggle to compete with international giants.
SEMI’s data shows that China’s annual expenditure surged from $28 billion in 2022 to $36.6 billion in 2023, with SEMI projecting this year’s figure to exceed $35 billion.
SEMI’s Senior Director of Market Intelligence, Zeng Ruiyu, told CNBC that this excessive investment may ultimately lead to “inefficient future capacity or underutilization,” putting pressure on competitors outside of China.
Chinese companies have extensive experience in producing traditional chips using process nodes of 28 nanometers and above. These chips are widely used in consumer electronics, automobiles, medical devices, and household appliances.
This suggests that the global market may soon face an issue of oversupply of traditional chips, a situation that has repeatedly occurred in other key industries developed by China such as steel, electric vehicles, and solar panels.
In the future, inexpensive Chinese chips may flood the market, making it challenging for manufacturers from other countries to compete with Chinese companies without further restrictions from Western nations.
However, Alex Capri, a Senior Lecturer at the National University of Singapore and a researcher at the Hinrich Foundation, pointed out to CNBC that China still has a long way to go in terms of more advanced and powerful chips.
Capri emphasized that the U.S. export controls effectively isolate China from cutting-edge manufacturing technologies (such as extreme ultraviolet lithography equipment), creating a bottleneck that could severely hinder China’s ambitions in advanced chip manufacturing.
Last year, the Netherlands and Japan imposed export restrictions on China’s advanced semiconductor equipment, aligning with Washington’s interests to sever China’s ties to critical technology.
“They are trying to figure out ways to manufacture, but it’s nearly impossible,” Capri said.
He noted that Huawei’s launch of the Mate 60 Pro smartphone featuring a 7-nanometer chip last year was an exception.
Capri explained that producing a 7-nanometer chip without extreme ultraviolet lithography equipment is a breakthrough, but he added, “It is less efficient and much more costly than using cutting-edge equipment.”
Capri warned that Chinese companies may be preemptively stockpiling chip manufacturing equipment to mitigate potential risks of further export restrictions on the industry by Washington before the U.S. presidential election.
At the end of August, China’s semiconductor giant SMIC disclosed its financial results for the first half of 2024. Despite revenue growth of over 20% year-on-year in Renminbi terms, net profit plummeted by 45%, with gross margin also significantly dropping by 8.5 percentage points to 13.9%. Analysts attribute the profit decline to the unreasonable costs of mass-producing 7-nanometer chips to rescue Huawei.
Moreover, as of the first quarter of this year, China’s production of traditional chips has grown by 40%. Industry experts believe that excess capacity may also be a reason for SMIC’s profit decline.
During a teleconference in May, Zhao Haijun, Co-CEO of SMIC, acknowledged that the company is facing significant price pressure due to substantial capacity expansions by domestic competitors.
Currently, the European Union has begun soliciting opinions from European semiconductor companies regarding China’s expansion of mature process chip production capacity and may further develop measures to prevent a large influx of Chinese chips into the European market.
In July of this year, an EU spokesperson confirmed to Reuters that the EU and the U.S. could “design joint or cooperative measures to address chip industry dependencies or distortions.”
The U.S. Department of Commerce conducted investigations on approximately 100 U.S. companies in the first quarter of 2024 to assess their reliance on Chinese companies in mature semiconductors. U.S. officials are concerned that overcapacity may lead to increased reliance on China, making American enterprises more vulnerable to supply chain disruptions.